In order to become a successful Forex trader, you need to master different techniques and concepts that will allow you to spot the best trading opportunities.
At the same time protecting your trading capital.
Learning all of this through an efficient, structured, and professional framework will greatly improve your understanding and knowledge of Forex trading.
There is a framework by which all of these things can be learned – we call it the three M’s: Mind, Money and Method.
Mind, Money and Method
Learning how to become a profitable FX trader is based on your capacity to develop a proven profitable trading strategy over-time (Method).
However, you cannot properly execute this trading method if you do not understand and control your risk, that’s why money management in Forex trading should be an essential component of your trading strategy (Money).
It’s worth mentioning that, even if you have the best trading method in the world – one that finds great Forex trading opportunities with appropriately applied money management techniques – if you’re not able to control your emotions and to follow your trading plan (Mind), you’ll not be successful.
So, let’s dig a little deeper into this Mind, Money and Method framework.
Mind – The psychology of trading
The market influences trader psychology, as much as investor behaviour influences the market.
Unfortunately, traders often underestimate the importance of trading psychology on their path to success, but it’s essential to take the time to understand and develop certain techniques and adopt the psychology of a winning Forex trader.
As emotions very often lead to mistakes when trading, your ability to contain your emotions and exercise discipline will enhance the chances of success over the long run.
So, how do you beat your emotions?
The field of Forex psychology has developed many sound methods for overcoming your unhelpful biases and emotions.
The most effective and easiest to implement are the following 3 concepts:
1. Be aware of the emotions and psychological biases that affect your trading
Emotions and psychological biases have no place in trading, as they affect your analytical skills and the way you make trading decisions.
Being aware of the various Forex market psychology traps that can influence you while trading is the first step in overcoming and controlling your emotions.
- And revenge
In contrast to the Efficient Market Hypothesis, which states that the market is rational, behavioural finance is the study of the effects of different factors (such as social, cognitive, and psychological) on our economical and investment decisions.
It also has consequences on fund allocation, diversification, market prices, and profits/losses.
Psychological biases, also called cognitive biases, describe the irrational decisions that we as humans tend to make. Daniel Kahneman, considered the father of behavioural finance, gives many examples of the different kinds of psychological biases that affect our decision making in his book “Thinking, Fast & Slow”.
Here are the most important cognitive psychological biases in decision-making you need to be aware of as an investor:
- Availability heuristic – choosing first the information that is easy to find and easily remembered
- Confirmation bias – looking for information that confirms your existing beliefs,
- Loss aversion – preferring not to lose 10$ than to make 10$
- Anchoring bias – relying too heavily on the first piece of information that you find, known as the “anchor”
- Overconfidence bias – overestimating your capacities (also known as the Dunning-Kruger effect)
- FOMO (Fear Of Missing Out) – jumping into an investment without really thinking due to fear of missing out on a great trading opportunity.
2. Set realistic trading goals to achieve better trading results
Once you’re aware of the emotions and psychological bias that can influence your behaviour, you need to set realistic and achievable trading goals to fight your emotions.
It’s important to be able to monitor and measure your success in achieving your objectives.
A great way to start planning realistic goals is to use the SMART goal method to bring organisation into your trading goals, so then you can clarify what you want to achieve, so then you can focus your time and energy into achieving it.
A SMART goal is Specific, Measurable, Attainable, Relevant and Timely.
3. Plan your trades to automate your trading process
Finally, you need to create a trading strategy to follow, so when your emotions are left behind: you’re simply following your trading plan, where every step of your trading style, method and money management is planned out.
We’ll elaborate on this point in the “Method – The trading plan” section.
All of these steps will help you to be prepared and to combat any toxic behaviours so they don’t negatively impact your performance. Don’t let your emotions take over – be the one in charge!
Money – The money and risk management
It’s impossible to create a trading system that is 100% profitable.
Losses are part of your trading journey and it’s important to accept them. However, to be successful and make money on the markets, your profits over time should always be higher than your losses.
Every day, there are traders that are wiped out, mostly because they didn’t use a trading strategy that properly accounts for risk. Perhaps they didn’t use a stop-loss and take-profit orders, used too much leverage, invested too much on a single position, averaged up/down, or didn’t diversify their portfolio well enough.
Even a good trading system can lose money if no money and risk management is taken into account, as the latter can turn your strategy into a profitable and reliable one.
The system you build should take into consideration risks and rewards, as the trade-off between the two is what will determine the success (or failure) of your trading strategy.
Money management is then all about maximising your returns at minimum risk with appropriate position sizing, relevant enter and exit strategies, diversification, and execution methods.
Method – The trading plan
As we explained, having a trading system to follow will help you trade according to a structured and detailed process.
This method is key to your trading success, as it should describe every single step of your decision-making process, including the method you use to analyse the market (technical analysis or fundamental analysis). It should also describe how much of your capital you’ll be allocating to each position, and how you’re going to manage your trading position once opened.
Every time you’re in front of the markets, the emotional side attached to trading will be greatly reduced. You’ll be more objective, because you’ll know exactly what to do when good trading setups appear.
When back-testing your trading system, it’s important to not fall into the trap of curve fitting – that is, creating a system that achieves optimal returns based on the very specific conditions of the tested historical data.
A strategy this specific will fall apart as soon as market conditions change. You want to create a system that performed reasonably well in the past, with wide enough parameters to take into account future trading conditions and remains profitable.
Have you Read?: Best Ways to Make a Living Trading Forex
Mind, Money, and Method – The framework
The “Mind, Money, and Method” framework is a very useful framework to follow when learning how to trade.
If you keep it in mind while learning to trade, mastering all the required trading skills and techniques will be a manageable task that will see you leaps and bounds ahead of the competition.
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CHAPTER QUICK LINKS
- 2.Why is Forex Popular?
- 3.Why Forex is (or isn’t) for You
- 4.How Does Forex Work?
- 5.Popular Traded Currencies
- 6.History of Forex Market
- 7.FX cash, CFD or Spread Bet?
- 8.How Margin Trading Works
- 9.Best Time of Day to Trade
- 10.Forex Regulation And Protection
- 11.Forex Trading Examples
- 12.Making a Living Trading Forex
- 14.Forex Risk Management Strategies
- 15.Winning Forex Strategies
- 16.Technical vs. Fundamental Analysis
- 17.New Forex Trader Mistakes
- 18.Dangers of Forex Trading
- 19.Next steps